THE BLOG
06/18/2009 05:12 am ET Updated May 25, 2011

Executive Pay and What to Do About It

The current economic crisis appears to have been caused by a combination of greed, dishonesty and stupidity. The greed is said to be a part of human nature, but was overlooked by regulators who did not believe in regulation, arguing that self-interest would prevent these institutions from damaging themselves. Dishonesty is closely associated with greed, and requires both legislation and close regulation to control. Stupidity is omnipresent to some degree -- it is just surprising how much of it surfaced in high places in this economic crisis, and the mind-boggling incomes of some of these people...

In 1965, U.S. CEOs at major companies made 24 times a worker's pay -- by 2004, CEOs earned 431 times the pay of an average worker. To understand how these huge salaries and bonuses came about, we need to review the history of the modern corporation -- often a large institution controlled by a small group of (mostly) men who actually have only a small portion of the (often huge) volume of common stock (i.e. shares of ownership of the corporation). Several centuries ago, the few corporations that were extant had often been formed to spread the risk of ventures such as sailing to trade with distant countries, with uncertain outcomes. Over the centuries, more corporations were formed, and some became very large and very rich. In the early 20th century, ownership of common stock was hardly as widespread as at is today. Stock was purchased mainly by the wealthier part of the population.

During the mid- to late 20th century, the volume of shares of common stock available and traded on stock exchanges exploded. "Institutional investors" including mutual funds, retirement funds, hedge funds, private equity funds et al. became significant players in stock markets and the corporations whose stock they held. This process may be referred to as "democratization," since large segments of the population have become indirect stockholders through their membership in these institutional investors. However, they do not get to vote at the annual meetings of the corporations whose stock the institutional investors own.

These institutional investors vote large blocs of stock at the corporate meetings, according to the interests of the particular institution. Their interests include stable and growing income and dividends. If their interests are met, they are unlikely to take a stand against excessive pay packages for upper echelon executives in large corporations. In fact, the income and "fringe benefits" of the executives of the institutional investor may be equally large.

In recent years effective control of some large corporations seems to have remained in the hands of a small group of financially knowledgeable people, a veritable oligarchy. The Board of Directors is filled with "good old boys" (and now some girls) who support the upper executive staff, and its decisions. It is difficult to introduce significant change from outside this management group.

Several decades ago, two brothers bought a small number of shares in some big corporations and attended shareholder meetings in person. They spoke up and introduced motions but, aside from some media coverage, accomplished little change. The control of many large corporations remains in the hands of a small group of people who control the votes of large blocs of stock. Note the recent populist outrage regarding the awarding of huge bonuses to executives who were part of the cause of the recent financial disasters, justified as "retention bonuses," although many left the company after the bonus.

Small shareholders in large corporations must form organizations to unify and organize their votes, advance their interests and attempt to limit the out-of control remuneration of these executives, many of whose incomes represent a much greater multiple of worker's salaries than those in other Western capitalist countries. Between 1995 and 2005, CEO pay in the U.S. went up 298%, while the average worker's pay went up by only 4.3%. A small-shareholder committee should have a full-time chairman who would monitor the corporation on behalf of small stockholders, deal with the executives and other groups of stockholders, and vote the proxies of the small shareholders at corporate meetings. He or she might even help prevent the awarding of large bonuses to executives who caused losses or damage to the corporation.